Beyond Financed Emissions: A Holistic Approach to Managing Climate Impact in the Financial Sector

The discourse around financed emissions has intensified among sustainability professionals in the finance sector. Measured under scope 3 category 15, emissions in this category are frequently the highest contributors in the greenhouse gas inventories of financial entities such as banks, insurance companies, private equity firms, and asset managers. However, it is crucial to acknowledge that the metric of financed emissions remains imperfect today. Obtaining high-quality data to measure the impact of financial institutions and tracking long-term progress poses significant challenges. While carbon disclosure from assets is becoming more prevalent, many necessitate estimation. Moreover, the financial values driving results like company valuation and revenue fluctuate annually, complicating the measurement of results. Furthermore, the issue of compounded emissions through the aggregation of Scope 3 emissions from investment companies within the same value chain raises concerns about double- triple- and quadruple counting. Considering the known limitations of this metric, fixating on financed emissions may not present the optimal solution. Instead, Schneider Electric proposes alternative approaches prioritizing real economy emission reduction and increasing positive impact through strategic investments.

Several frameworks offer guidance to sustainability and investment professionals on the best approaches for managing financed emissions. The Science Based Targets initiative (SBTi), known as the gold standard for corporates to set targets on emission reduction in line with science, has dedicated guidance for the financial sector. In this document, engagement is paramount. The goal is not to reduce an absolute number but rather to engage with investment companies to set Science Based Targets and align with the temperature goals set under the Paris Agreement. When the financial institution is invested in designated high-emitting sectors, the physical intensity of those activities must be aligned with temperature-driven pathways. Schneider Electric has been supporting several private equity firms and insurance companies in setting those targets. The result of this work is the integration of this target into the investment guidelines ensuring alignment of the portfolio with companies that adhere to SBTi goals. Other guidance for the investment community can be found with the Net Zero Investment Framework that recommends financial institutions set several objectives and targets, one of which is related to financed emissions, the others being focused on the engagement and alignment of the portfolio with net zero pathways.

Another way to look at the impact of investments is by considering the potential avoided emissions resulting from those investments. Avoided emissions refer to the "positive" impact on society when comparing the GHG impact of a solution to an alternative reference scenario where the solution would not be used. This is calculated by measuring the difference between GHG emissions that occur or will occur (the "solution") and GHG emissions that would have occurred without the solution (that of the reference scenario). Avoided emissions are important for investors as an additional metric because they provide an additional opportunity-oriented lens that can help identify, assess, and ultimately invest in companies that are future-proofing their businesses by leading the green transition and driving decarbonization with their solutions. This approach enables investors to move beyond simply considering investees' GHG emissions and associated risks. It helps them understand and quantify the opportunities that align with net-zero goals associated with both current and future investment decisions.¹ Schneider Electric is a pioneer in this space, being one of the first companies to develop an internal methodology to assess the avoided emissions related to the products and services that the company delivers. This work supports an ambitious goal to help Schneider customers save and avoid 800 million tonnes of CO2 emissions by 2025.

In conclusion, while financed emissions may be imperfect, it remains a crucial metric that can be perfected over time to better reflect to the real economy impact of financial firms. Refusing to let perfection get in the way of progress, financial firms can start today by addressing the climate impact of their investments by aligning their portfolios with companies dedicated to reducing their emissions over time. In addition, measuring alternative metrics such as avoided emissions will showcase efforts to invest in climate solutions and the real-world positive impact of those investments.

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